Orders Outside Core Markets Cushion Sales Drop for BAE

Feb. 21, 2013 - 10:29AM
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LONDON — Orders from outside of core British and U.S. markets lifted BAE Systems in 2012, although overall sales and pretax profits fell for Europe’s premier defense company in what it labeled a difficult environment as it rolled out annual results Thursday.

Non U.K./U.S. orders totaled 11.2 billion pounds ($17.2 billion) last year on the back of significant deals for CV90 armored vehicles, Typhoon fast combat jets, Hawk jet trainers, F-16 updates and other equipment. The previous year the figure stood at just 4.8 billion pounds.

With an announcement that BAE will buy back up to 1 billion pounds in shares over the next three years and helped by what was generally seen by financial analysts as a good performance, the company’s share price moved ahead strongly.

Headline figures included 2012 revenues down to 17.8 billion pounds from 19.1 billion pounds the previous year, while pretax profits slipped marginally to 1.3 billion pounds compared with 1.4 billion pounds. The results were up on expectations.

Despite what the company termed a difficult trading environment, order intake overall rose 8 percent for the year to reach 17.8 billion pounds.

Chief Executive Ian King said the figures showed the company’s geographic diversity was providing resilience at a time when budget downturns were impacting some markets.

“Our strategic response has been to target international markets outside the U.K. and U.S. We have made excellent progress with our [total] backlog rising for the first time since 2009 to over 42 billion pounds,” he said.”

Upcoming opportunities for exports listed by BAE included potential sales of the Typhoon in the United Arab Emirates, Malaysia and India; a long-term support deal for the fighter aircraft in Saudi Arabia; M777 artillery; a further sale of 20 Hawk trainers to India; and a CV90 sale to Denmark.

BAE failed to pull off a potentially spectacular merger with EADS last year, which would have created the world’s largest defense and aerospace player.

Despite the large order intake, much of it resulting from orders for Hawks and other deals with Saudi Arabia during the year, BAE has failed to complete negotiations with the gulf state over price escalation relating to the order for 72 Typhoon jets. The long-running negotiations continue, but King said the company would only strike a deal “at the right price; timing is not driving us to make a decision.”

The size of the share buy-back deal is dependent on a successful conclusion to the Typhoon price talks, said the company.

BAE did reveal, though, that deliveries of Typhoons to the Saudis, which have been on ice for two years while a revised final assembly plan was agreed, will recommence this year.

Twenty-four Typhoons have been delivered. The original scheme was to have the final 48 machines assembled in Saudi Arabia, but that arrangement fell apart. A company spokeswoman said the renewed deliveries will commence in May with an additional nine aircraft to follow by the end of the year.

Deliveries of the current order are scheduled to be completed in 2017, but the two sides are already discussing a potential follow-on deal.

Speaking to reporters here, King played down the possible impact sequestration or other U.S. budget cuts may have on business, saying international sales growth would “more than compensate the impact of sequestration” on company revenues.

At its worst, the potential business downturn would cost “about 1 billion pounds of revenue ... the cash flow impact of that is not huge,” he said.

Cash flow is one thing, but as BAE reported yesterday, the impact of U.S. defense cuts on employees could be much more damaging.

The company issued notice Wednesday that the jobs of 3,500 people at its U.S. naval support yards could be at risk should the U.S. Defense Department implement maintenance contract cuts.